How Does A Buyer Get Out Of The Deal?

TorontoRealtyBlog

In most cases: they don't.

Not legally, that is, and not without a fight from the seller, and potentially serious repercussions.

I've been asked a few times in the past month either "what happens when a buyer won't close?" or, "how can a buyer get out of a firm deal."

Let's look at the legal grey areas, and I'll give you a few case studies to chew on…

Legal grey area.

That's what I referred to in the intro, but when you really think about it, isn't most of the law some sort of grey area?

Yes, we have laws.  Those laws are black and white.

But most of the law – interpretation, enforcement, and discussion, falls into that grey area.  Isn't that why we have trials, instead of just throwing the book at somebody on the spot?

In any event, when it comes to the laws that relate to the closing of a real estate transaction, much of the interpretation, and practice, fall into that grey area.

Every time I'm asked a hypothetical about a buyer wanting out of a transaction, I usually say, "It's a grey area."

It all depends on what a buyer or seller wants to do, how much time and money they want to spend arguing their position, and which side will give up first.

For example, if a buyer and a seller enter into a transaction, each in good faith, and the buyer changes his or her mind and wants out of the deal, you might simply say, "That's not grounds to do so.  It's black and white."  But it's up to that buyer to prove, often with the help of a lawyer, that there was some sort of misrepresentation on the part of the seller, or some sort of harm caused, that would, could, or should allow the buyer an out.

Now you might say, "Well that's not fair – they're in the wrong, and they're trying to argue their way out of it."

Right.  Welcome to the legal world…

When it comes to real estate transactions where one party wants out of the deal, I would say that 90% of the time, it's the buyer, as opposed to the seller.  And when it's the buyer, I would say that 90% of the time, he or she has simply changed his or her mind.

That buyer might argue there's something wrong with the property, or some sort of misrepresentation was made, but it's almost always a case of a change of mind.

So when can a buyer legally get out of a transaction?

In the pre-construction condominium world, there's a government-mandated 10-day rescission period, or "cooling off period" as it's most commonly referred to.

The government mandates this, in my opinion, because these purchases are often made with more emotion, and less thought, than purchases in the resale world.  There's a also a lot of legalese involved, which the buyer would have his or her lawyer review during that 10-day period.

Of course, in practice, many buyers are too cheap and/or stupid to pay the $2,000 or-so to have a lawyer review the Agreement of Purchase & Sale, and these are the buyers who usually get stuck with the massive closing costs and hidden fees upon completion.

There's a reason that there's a law mandating the use of a seat-belt, even though it's there to save your life: people might not use it.

By the same token, the government has mandated that 10-day cooling-off period for pre-construction condos because they have to force buyers to be smart, think things through, consult a lawyer, and really consider whether they want to follow through with the transaction.

In the resale world, a buyer can get out of an agreement if the agreement is conditional, and depending on how the condition is worded, they might not have to do anything to get out of that deal.

Here's how I word my home inspection clause, for example:

This Offer is conditional upon the inspection of the subject property by a home inspector at the Buyer's own expense,
and the obtaining of a report satisfactory to the Buyer in the Buyer's sole and absolute discretion. Unless the Buyer
gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of
notice in this Agreement of Purchase and Sale or any Schedule thereto within two (2) business days from acceptance
hereof, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in
full without deduction.

Note the words "sole and absolute discretion."

That means there's no arguing over what's material or what isn't.  It's simply up to the buyer.

But more importantly, note the section that reads, "Unless the Buyer gives notice in writing…"

This means that the deal automatically falls through, unless the buyer provides a Waiver of the condition, or a Notice of Fulfillment of that condition.

Buyers often ask me things like, "Does the seller get a copy of the inspection?"  Or, "If we find something wrong, can the seller object?  Can the seller opt to fix the issue, and force us to go ahead?"

These questions, and these points, are moot, when you have a clause like the one above, where the deal automatically falls through.  This is a condition precedent, as opposed to a condition subsequent, and it's how all clauses should be written by buyers.

Now, let's turn our attention to the real question of "When can a buyer get out of a deal?"

Let's look at when the buyer has no real right to do so, but wants to, usually because they change their mind.

First, let's look at the case where the buyer changes his or her mind, during a conditional period.

Let's say a buyer purchases a condominium conditional on the lawyer's review of the Status Certificate.

But that night, the buyer gets cold feet, and wants out of the deal.

No problem, right?  The buyer has a condition – they can get out of the deal.

True.

However, the buyer needs to ensure that they use that condition, and not simply change their mind.  And this is where things get interesting.

If the buyer, the morning after the deal is reached, does not provide the deposit cheque, then the seller can sue the buyer for not following through with the transaction.

Instead, the buyer should provide the deposit cheque, which will be held in trust by the listing brokerage, go through the motions to have the Status Certificate reviewed, not sign the Waiver or Notice of Fulfillment, and then when the deal falls through, ask for a Mutual Release, and the deposit back.

It sounds crazy, I know.  Most of you would say, "I would never hand over the cheque and then try to get it back."

But ask a lawyer, and they'll all tell you this is the way it's done.  If you don't provide the cheque, the buyer can sue you.  It's cut and dry.

So now let's look at firm deals, where there is no condition, and where the buyer wants out of the deal.

Unlike in some countries, or on TV, or as some media inaccurately report, if the buyer doesn't close the deal on the scheduled closing date, the deposit does not automatically default to the seller.

In fact, under REBBA, there are only three ways in which the deposit, being held in a listing brokerage's trust account, can be released:

1) Successful completion of a transaction.
2) Court order.
3) Mutual release.

So if a deal is scheduled to close on June 5th, the buyer says, "I'm not closing," and the days tick by, at no point can the seller access that deposit, unless a court orders the funds to be released to the seller, or the buyer signs a mutual release and forfeits the deposit.

But just to throw another wrinkle into the equation – consider this: at no time can a brokerage hold two deposits for the same property.

So if that deal, that's scheduled to close on June 5th, doesn't close, and the seller finds another buyer, they can't sell their home until they sign a mutual release for the first deal – either giving the deposit back to the buyer, or providing for some agreed-upon restitution.

What this means, is that for the seller to say, "I'll never give you that deposit back," is often an empty threat.  More often than not, the seller needs to sell his or her house, and often has no choice but to sign the mutual release, and allow the deposit to be returned to the buyer.  The seller is forced to sue the original buyer afterwards.

Let me give you an example.

I've told this story before, I believe in a blog about "stigma" of houses.

A colleague of mine had a listing in North Toronto a few years back, and it was sold to a buyer for $1,500,000.

The buyer, about a week after signing the agreement, said he wanted out of the deal.

The seller balked, and said "See you at closing."

The buyer said, "I will not close, so you're wasting your time making threats.  You're best to let me out of the deal, and get the property back up for sale."

The seller balked again.

The closing date came along two months later, and the buyer refused to close.

For a couple of weeks, the seller waited out the buyer.  But the seller needed to sell; they were closing a purchase of their own in a few weeks, and needed a firm deal to get bridge financing.

So the seller signed a mutual release, and let the buyer out of the deal, intending to sue them down the line.

Unfortunately, when the "FOR SALE" sign went back up, the market didn't respond well.  This was the point I made about stigma – the buyer pool wondered why the house was being sold again six weeks later.

The house was sold again, conditionally, and that deal fell through when a buyer got cold feet.

The third time was the charm, however, and the house was sold firm.  But it was only sold for $1,400,000.

The deal closed, and then the seller sued the original buyer for the $100,000 difference.

They settled out of court for $50,000.

The original buyer had zero right to get out of that deal.

The seller was 100% entitled to that $100,000 difference between the original purchase price, and the eventual sale price.

But note that the buyer has to take legal action, which takes time, and money.

I've only had a buyer back out of a deal once.

I sold a condo, conditionally, and the next morning, my client called me and said that he had changed his mind.

I told him what I told you guys earlier in this blog post – that he should provide the deposit cheque, go through the motions with the condition, and not provide a waiver.

He said, "That's the smart thing to do.  But I don't believe for a second that the seller is going to sue me.  Plus, I have you as my agent, and you can talk our way out of this.  I know you can."

And so that's what I did.

I called the listing agent, told her I was sorry, but my client wasn't going to follow through, and based on how hot the condo market was (this was 3-4 years ago), she said that she was disappointed, but she knew she would resell it.

She ended up selling it for $3,000 less than my client had contracted to purchase it a week earlier, but they didn't sue my client.  For $3,000, I don't know that anybody would spend the time and money.

So what's the take-away from these two stories, and all my preamble?

It's all one big grey area.

Ask me "can a buyer get out of a deal?" and I'll give you a multitude of different answers, depending on the parties involved, and the situation at hand.

Just remember that if you're a seller, you need to get that deposit cheque when you sell your home!

It's a lot easier for a buyer to walk away from a deal when they haven't provided a deposit cheque (assuming it's a bank draft or certified cheque) than after they've already handed their money over to the listing brokerage, where it's being held in trust.

If you're a seller in this market, and you find yourself with multiple offers, you're crazy to accept the highest offer without a cheque.  If the buyer changes his or her mind the next morning, you're either chasing down the other buyers from the night before, or you're going back on the market, and doing it all over again.  If that's the case, the stigma applies, and you're almost guaranteed to get less for your property.

If you're a buyer in this market, don't ever assume you can get out of a firm deal, no matter how strong your resolve, or how big and tough your lawyer is.

The post How Does A Buyer Get Out Of The Deal? appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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